The MT Diary

'Cher Tony' wows Paris; Sarkozy contemplates grands projets; tensions in euroland.

by Howard Davies
Last Updated: 31 Aug 2010

The French are not like us (you read it here first). While we and the Americans endlessly debate the relative merits of buying troubled assets or preference shares to bail out the banks, France is engaged in a full-on argument about the future of capitalism and the role of the state.

Nicolas Sarkozy hosted a two-day debate in the ecole Militaire on the theme of 'New World, New Capitalism'. All the stops were pulled out. Sarkozy himself kicked things off, then Angela Merkel, followed by 'Cher Tony' - our very own Tony Blair. Shurely shome mishtake, I hear you say. Non. It was indeed the departed Great Leader. Our present Dear Leader seemed to be otherwise engaged on the domestic front.

First in French, then in English, with a bit of Franglais thrown in, he wowed the crowd. The correct French protocol is to call people by the highest rank they have held, so he was Prime Minister Blair for the two days, which added to the disorientation of the Brits in attendance. Maybe soon he will be President of Europe, which will sort that problem.

The energetic French minister in the driving seat, eric Besson, wanted the event to be underpinned by a modest amount of intellectual capital, provided on the French side by their political science school, 'Sciences Po', and on the British side by the London School of Economics. A few Nobel Prize winners - Amartya Sen and Joseph Stiglitz among them - added a touch of glamour to the proceedings.

What did we conclude? That would be telling. But if you make up a long sentence with the words alienation, delocalisation, revalorising, solidarity, crisis (at least twice) and paradigm (three times), you will get close.

The striking thing was how comfortable the Right in France feels about what it calls the 'return of the state'. Not for it the apologetic tone of ministers here about the unfortunate need to intervene, and even nationalise.

Sarkozy's prime minister, Francois Fillon - a very impressive fellow - waxed lyrical about a revival of true Gaullism. President de Gaulle was always happy to decide big questions on behalf of the people, and to put the markets right when they strayed. 'You can't buck the state' is roughly the way Fillon likes to put it.

It's not quite the platform Sarkozy was elected on, but it fits him like a glove. The need to stimulate the economy (though they aren't doing as badly as we are, I'm sorry to report) is an excuse for some new grands projets. Since Tessa Jowell is getting cold feet about the expense, I wonder if we shouldn't, even at this late stage, offer Paris the Olympics. It would be a happy outcome for both sides.

Elsewhere in the euro area, trouble is brewing. The Greek government is in crisis, as we know. And there are growing tensions elsewhere. The Spanish economy, with its dual reliance on the construction industry and on feckless British tourists, is in free fall. The Italians and Portuguese are looking very pale, too. They think the European Central Bank was slow to help them, and of course they are suffering from the euro's vertiginous rise.

The single currency has been a success so far - at least, in a technical sense. All the British and US forecasts of doom have been well up to Met Office standards of accuracy. Like, oh, 0.1% of MT readers (at a guess), I am a fan of the euro, and wish we had it here. But I have to accept that the first four years were relatively easy. The world economy was racing along. So the recession presents it with its first big test.

The problem is that countries like Italy and Portugal - in what we don't call the Club Med - have not used the euro as a stimulus to improvements in productivity and competitive- ness, while the Germans have. In the years since 1994, unit labour costs have grown about 30% more in Italy than in Germany, for example. Nor have these countries done much to cut their debt. So even though they all use the euro, a spread of up to 2% has opened up in the sovereign debt markets.

The only way one can interpret this is that the markets think there is a chance these countries might conceivably be forced to leave the single currency, and convert their debt back to lire or what-have-you. It is still a very long shot, I would say, but finance folk are whispering about it in quiet corners.

I found 3,000 escudos the other day at the bottom of a little-used drawer. If I go to Lisbon, the Bank of Portugal will give me EUR15 for them. But maybe I'll hang on to them just in case.

For the moment, though, it's perhaps best if we don't trumpet the benefits of a flexible economy too loudly. On my way to France, it was embarrassing to find the Eurostar full of French shoppers, filling the luggage racks with their ill-gotten gains. You can't think about one of those nice long lunches in Paris any more. And as for that bijou little studio on the Ile St Louis, dream on.

It will be holidays in Cornwall this year, or conceivably South Korea, where the won has gone west. I suppose there is always Reykjavik, if you are prepared to brave the vigilante bands of Vikings looking for Englishmen on whom to exact revenge for their economic woes - caused mainly by Alistair Darling, so the saga goes. Leave your West Ham shirt at home.

- Howard Davies is the director of the London School of Economics.

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